Granular Stock Market

Simone Alfarano and Omar Blanco-Arroyo
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Simone Alfarano: Universitat Jaume I
Omar Blanco-Arroyo: Universitat de València

No 2608, Working Papers from Department of Applied Economics II, Universidad de Valencia

Abstract: We study how rising concentration in the U.S. stock market affects the transmis- sion of firm-level risk to aggregate volatility. Using a variance decomposition that separates common and granular components of market returns, we document a shift in the composition of idiosyncratic risk since the mid-2010s. Whereas idiosyncratic volatility previously reflected cross-firm comovement, it is now increasingly driven by the weighted variances of a small number of large firms. We show that this change is not explained by concentration alone, but by a reallocation of idiosyncratic risk toward dominant firms. As a result, aggregate volatility becomes more sensitive to firm-specific shocks at the top of the size distribution.

Keywords: granularity; market concentration; idiosyncratic volatility; firm size distribution; aggregate volatility (search for similar items in EconPapers)
JEL-codes: E44 G12 G14 (search for similar items in EconPapers)
Date: 2026-05
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